<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
---------------
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number. 333-64745
---------------
PENHALL INTERNATIONAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ARIZONA 86-0634394
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1801 PENHALL WAY, ANAHEIM, CA 92803
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(714) 772-6450
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
Indicate by check mark whether the Registrant (1) filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS AND TITLE OF SHARES OUTSTANDING AS OF
CAPITAL STOCK MAY 10, 1999
---------------------------- ------------------------
Common Stock, $.01 Par Value 994,477
================================================================================
<PAGE> 2
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Item 1. Financial Information
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 234,000 $ 2,891,000
Receivables:
Contract and trade receivables ................................... 23,454,000 25,913,000
Contract retentions .............................................. 4,454,000 5,121,000
Income taxes receivable .......................................... 2,399,000 4,429,000
------------- -------------
30,307,000 35,463,000
Less allowance for doubtful receivables .......................... 995,000 1,259,000
------------- -------------
Net receivables ......................................... 29,312,000 34,204,000
Costs and estimated earnings in excess of billings on uncompleted contracts . 976,000 178,000
Deferred tax assets ......................................................... 891,000 1,194,000
Inventories ................................................................. 1,458,000 1,904,000
Prepaid expenses and other current assets ................................... 670,000 955,000
------------- -------------
Total current assets .................................... 33,541,000 41,326,000
Property, plant and equipment, at cost:
Land ........................................................................ 4,538,000 5,231,000
Buildings and leasehold improvements ........................................ 7,715,000 7,373,000
Construction and other equipment ............................................ 67,934,000 80,986,000
------------- -------------
80,187,000 93,590,000
Less accumulated depreciation and amortization .............................. 35,180,000 40,849,000
------------- -------------
Net property, plant and equipment ....................... 45,007,000 52,741,000
Goodwill, net of accumulated amortization ..................................... 8,649,000 8,271,000
Debt issuance costs, net of accumulated amortization .......................... 719,000 6,062,000
Other assets, net ............................................................. 407,000 1,359,000
------------- -------------
$ 88,323,000 $ 109,759,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt ...................................... $ 2,034,000 $ 2,860,000
Current installments of notes payable to stockholders....................... 131,000 --
Trade accounts payable ...................................................... 7,532,000 8,087,000
Accrued liabilities ......................................................... 9,041,000 9,735,000
Billings in excess of costs and estimated earnings on uncompleted contracts . 665,000 224,000
------------- -------------
Total current liabilities ............................... 19,403,000 20,906,000
Long-term debt, excluding current portion ..................................... 16,125,000 29,823,000
Notes payable to stockholders, excluding current portion ...................... 274,000 --
Senior notes .................................................................. -- 100,000,000
Deferred tax liabilities ...................................................... 3,609,000 4,572,000
Accrued compensation .......................................................... 5,306,000 --
Senior Exchangeable Preferred Stock, redemption value $10,715,000. Authorized,
issued and outstanding 10,000 shares ........................................ -- 10,715,000
Series A Preferred Stock, redemption value $11,358,000. Authorized 25,000
shares; issued and outstanding 10,428 shares ................................ -- 11,358,000
Stockholders' equity (deficit):
Series B Preferred Stock, par value $.01 per share. Authorized 50,000 shares;
issued and outstanding 18,572 shares ...................................... -- 20,229,000
Common stock, $.01 par value. Authorized 5,000,000 shares; issued and
outstanding 4,452,264 and 995,000 shares at June 30, 1998 and
March 31, 1999, respectively .............................................. 42,000 10,000
Additional paid-in capital .................................................. 14,498,000 985,000
Retained earnings (accumulated deficit) ..................................... 29,066,000 (88,839,000)
------------- -------------
Total stockholders' equity (deficit) .................... 43,606,000 (67,615,000)
Commitments and contingencies .................................................
Subsequent events .............................................................
------------- -------------
$ 88,323,000 $ 109,759,000
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTH PERIODS NINE MONTH PERIODS
ENDED MARCH 31, ENDED MARCH 31,
-------------------------------- -------------------------------
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues ......................................... $ 19,731,000 $ 30,899,000 $ 71,818,000 $ 102,896,000
Cost of revenues ................................. 14,281,000 21,670,000 50,874,000 72,266,000
------------- ------------- ------------- -------------
Gross profit ................................... 5,450,000 9,229,000 20,944,000 30,630,000
General and administrative expenses .............. 4,154,000 6,468,000 13,965,000 29,964,000
Other operating income (expense), net ............ (271,000) 427,000 416,000 867,000
------------- ------------- ------------- -------------
Earnings before interest expense and
income taxes ................................. 1,025,000 3,188,000 7,395,000 1,533,000
Interest expense ................................. 208,000 3,954,000 697,000 10,486,000
------------- ------------- ------------- -------------
Earnings (loss) before income taxes ............ 817,000 (766,000) 6,698,000 (8,953,000)
Income taxes ..................................... 395,000 (138,000) 2,978,000 (1,791,000)
------------- ------------- ------------- -------------
Net earnings (loss) .............................. 422,000 (628,000) 3,720,000 (7,162,000)
------------- ------------- ------------- -------------
Accretion of preferred stock to redemption value . -- (632,000) -- (1,645,000)
Accrual of cumulative dividends on preferred stock -- (638,000) -- (1,657,000)
------------- ------------- ------------- -------------
Net earnings (loss) available to common
Stockholders ................................... $ 422,000 $ (1,898,000) $ 3,720,000 $ (10,464,000)
============= ============= ============= =============
Earnings (loss) per share:
Basic .......................................... $ 0.10 $ (1.91) $ 0.87 $ (7.35)
Diluted ........................................ $ 0.10 $ (1.91) $ 0.85 $ (7.35)
Number of shares used in per share computations:
Basic .......................................... 4,273,833 995,000 4,278,579 1,424,004
Diluted ........................................ 4,353,012 995,000 4,357,758 1,424,004
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTH PERIODS
ENDED MARCH 31,
-----------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ............................................................. $ 3,720,000 $ (7,162,000)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................................ 6,397,000 8,374,000
Amortization of debt issuance costs .......................................... -- 592,000
Provision for doubtful accounts .............................................. (3,000) 264,000
Provision for deferred taxes ................................................. (18,000) 511,000
Gains on sale of assets ...................................................... (103,000) (335,000)
Changes in assets and liabilities, net of effects of acquisitions
Receivables ............................................................... 1,612,000 (3,704,000)
Inventories, prepaid expenses and other assets ............................ (589,000) (68,000)
Costs and estimated earnings in excess of billings on uncompleted contracts (229,000) 798,000
Trade accounts payable and accrued liabilities ............................ (54,000) (1,450,000)
Billings in excess of costs and estimated earnings on uncompleted contracts 853,000 (441,000)
Accrued compensation ...................................................... 1,476,000 (5,233,000)
------------- -------------
Net cash provided by (used in) operating activities ................... 13,062,000 (7,854,000)
------------- -------------
Cash flows from investing activities:
Proceeds from sale of assets .................................................... 924,000 723,000
Capital expenditures ............................................................ (10,013,000) (10,421,000)
Acquisitions of Daley Concrete Cutting and Lipscomb
Concrete Cutting, net of cash acquired ........................................ -- (6,724,000)
------------- -------------
Net cash used in investing activities ................................. (9,089,000) (16,422,000)
------------- -------------
Cash flows from financing activities:
Borrowings under long-term debt ................................................. 17,681,000 38,795,000
Repayments of long-term debt .................................................... (21,518,000) (25,447,000)
Paydown on notes payable to stockholders ........................................ (750,000) (405,000)
Book overdraft .................................................................. -- 1,912,000
Borrowings on Senior Notes ...................................................... -- 100,000,000
Debt issuance costs ............................................................. -- (5,935,000)
Proceeds from issuance of common stock .......................................... -- 399,000
Repurchase of common stock ...................................................... (56,000) (93,050,000)
Issuance of Series A Preferred Stock ............................................ -- 10,428,000
Issuance of Series B Preferred Stock ............................................ -- 236,000
------------- -------------
Net cash provided by (used in) financing activities ................... (4,643,000) 26,933,000
------------- -------------
Net increase (decrease) in cash and cash equivalents .................. (670,000) 2,657,000
Cash and cash equivalents at beginning of period .................................. 676,000 234,000
------------- -------------
Cash and cash equivalents at end of period ........................................ $ 6,000 $ 2,891,000
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes .................................................................... $ 2,552,000 $ --
============= =============
Interest ........................................................................ $ 764,000 $ 7,564,000
============= =============
Supplemental disclosure of noncash investing and financing activities:
Borrowings related to the acquisition of assets ................................... $ 1,554,000 $ 876,000
============= =============
Issuance of Senior Exchangeable Preferred Stock in connection with the
Recapitalization Mergers ........................................................ -- $ 10,000,000
============= =============
Accretion of Preferred Stock to redemption value .................................. -- $ 1,645,000
============= =============
Accrual of cumulative dividends on preferred stock ................................ -- $ 1,657,000
============= =============
Issuance of Series B Preferred Stock .............................................. -- $ 18,335,000
============= =============
</TABLE>
The fair value of the Daley Concrete Cutting and Lipscomb Concrete Cutting net
assets at their dates of acquisition in fiscal 1999 was $3.4 million and $3.9
million, respectively. Goodwill of $300,000 was recorded in connection with the
acquisitions.
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
(1) BASIS OF PRESENTATION
Penhall International, Inc. ("PII") was founded in 1957 and was incorporated
in the state of California on April 19, 1988. On August 4, 1998, $100,000,000 of
12% Senior Notes (the Senior Notes) were sold by Penhall Acquisition Corp., an
Arizona corporation formed by an unrelated third party (the Third Party) to
effect the recapitalization of PII. As part of the recapitalization, a series of
mergers (the Recapitalization Mergers) were consummated pursuant to which
Phoenix Concrete Cutting, Inc., a wholly-owned subsidiary of PII, became the
corporate parent of PII, the Third Party acquired a 62.5% interest in Phoenix
Concrete Cutting, Inc. and Phoenix Concrete Cutting, Inc. became the successor
obligor of the Senior Notes. Following the consummation of the Recapitalization
Mergers, Phoenix Concrete Cutting, Inc. changed its name to Penhall
International Corp., and PII changed its name to Penhall Rental Corp.
Under generally accepted accounting principles, the Recapitalization Mergers
were accounted for as a leveraged recapitalization transaction in a manner
similar to a pooling-of-interests. Under this method, the transfer of
controlling interest in PII to a new investor did not change the accounting
basis of the assets and liabilities in PII's separate stand-alone financial
statements.
On October 1, 1998 all of the operating assets and liabilities of Penhall
International Corp. were transferred to Penhall Company. As a result, all of the
operating divisions of the Company are owned by Penhall Company.
The accompanying unaudited condensed consolidated financial statements of
Penhall International Corp. ("Penhall" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
Results of operations for the three and nine month periods ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year ending June 30, 1999. The unaudited condensed consolidated financial
statements included herein should be read in conjunction with the Company's
audited consolidated financial statements and footnotes thereto included in the
Registration statement on Form S-4 as of and for the year ended June 30, 1998.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing adjusted net
earnings (loss) available to common stockholders by the weighted average number
of common shares outstanding during the period. The Company has granted certain
options which have been treated as potentially dilutive common shares for
purposes of calculating diluted earnings (loss) per share. Dilutive earnings
(loss) per share reflects the potential dilution that could share in the
earnings of the Company. Such shares are not included when there is a loss as
the effect would be anti-dilutive.
All common shares included in the condensed consolidated financial
statements and earnings (loss) per share calculations have been restated to
reflect a 10.56 to one common stock split effected as part of the
Recapitalization Mergers.
5
<PAGE> 6
The following table sets forth the calculation of diluted earnings (loss)
per share for the three and nine month periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
MARCH 31, MARCH 31,
(UNAUDITED) (UNAUDITED)
-------------------------------- --------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net earnings (loss) available to common
shareholders ................................... $ 422,000 $ (1,898,000) $ 3,720,000 $(10,464,000)
============ ============ ============ ============
Weighted average shares - basic ................ 4,273,833 995,000 4,278,579 1,424,004
Plus incremental shares from assumed conversion
of stock options ............................... 79,179 -- 79,179 --
------------ ------------ ------------ ------------
Weighted average shares - dilutive ............. 4,353,012 995,000 4,357,758 1,424,004
============ ============ ============ ============
Diluted earnings (loss) per share ............. $ .10 $ (1.91) $ .85 $ (7.35)
============ ============ ============ ============
</TABLE>
There are no stock options outstanding at March 31, 1999.
CASH EQUIVALENTS
All highly liquid debt instruments with original maturities with three
months or less are considered to be cash equivalents.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' balances to conform
to the current presentation.
(2) SENIOR NOTES AND LONG-TERM DEBT
SENIOR NOTES
On August 4, 1998, in connection with the Recapitalization Mergers, the
Company issued $100,000,000 of Senior Notes guaranteed by the wholly-owned
subsidiaries of Penhall International Corp. Interest at 12% is payable
semiannually in arrears beginning February 1, 1999; all unpaid principal and
interest is due August 1, 2006. In addition, the Senior Notes are redeemable at
the Company's option, in whole at any time or in part from time to time, on or
after August 1, 2003, at certain redemption rates ranging from 106% to 102%. The
Senior Notes contain certain financial and non-financial covenants. As of March
31, 1999 the Company was in compliance with all such covenants.
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1999
----------- -----------
<S> <C> <C>
The Company had a secured bank line of credit with the Company's principal bank
for working capital purposes which was repaid in full on August 4, 1998 ...... 13,860,000 --
Note payable secured by certain equipment, bearing interest at 6.0%; payable in
annual principal and interest installments of $208,000; all unpaid principal
and interest due June 4, 2000 ................................................ 381,000 381,000
Note payable secured by property in Austin, Texas, bearing interest at 10.0%;
payable in monthly principal and interest installments of $1,815; all unpaid
principal and interest due November 1, 2021 .................................. 197,000 195,000
Note payable secured by certain equipment, bearing interest at 5.51%; payable in
two installments of principal and interest of $2,000,000 due on April 29,
1999 and 2000 ................................................................ 3,692,000 3,692,000
Note payable, bearing interest at 6.00%; payable on November 1, 1999 ............ -- 876,000
$20,000,000 Term Loan secured by certain assets of the Company; principal
payments of $750,000 per quarter commencing September 15, 2000 through June
15, 2001, $1,250,000 per quarter through June 15, 2002 and $1,500,000 per
quarter through June 15, 2004. The Company may elect to maintain the Term
Loan as a Base Rate Loan, which accrues interest quarterly at 1.25% plus the
higher of the Federal Funds Effective Rate (as defined) or the current prime
rate and is payable quarterly, and/or convert into a Eurodollar Loan, which
accrues interest at 2.25% plus the Eurodollar Rate (as defined) and is
payable on the last day of each elected interest period, which shall range
from one to six months, as elected by the Company. All unpaid
principal and interest is due June 15, 2004 .................................. -- 20,000,000
Revolving Loan in the maximum credit amount of $30,000,000 secured by certain
assets of the Company. The Company may elect to maintain the Revolving Loan
as a Base Rate Loan, which accrues interest quarterly at 1.25% plus the higher
of the Federal Funds Effective Rate (as defined) or the then current prime
rate and is payable quarterly, and/or convert into a Eurodollar Loan, which
accrues interest at 2.25% plus the Eurodollar Rate (as defined) and is payable
on the last day of each elected interest period, which shall range from one
to six months, as elected by the Company. All unpaid principal and interest
is due June 15, 2004 ......................................................... -- 7,500,000
Other ........................................................................... 29,000 39,000
----------- -----------
18,159,000 32,683,000
Less current installments of long-term debt ..................................... 2,034,000 2,860,000
----------- -----------
Long-term debt, excluding current installments .................................. $16,125,000 $29,823,000
=========== ===========
</TABLE>
The weighted average interest rate for the borrowings under the revolving credit
agreement was 7.21% at March 31, 1999. The interest rate on the $20,000,000 term
loan was 7.25% at March 31, 1999.
6
<PAGE> 7
(3) REDEEMABLE PREFERRED STOCK
SENIOR EXCHANGEABLE PREFERRED STOCK
As of August 4, 1998 and in connection with the Recapitalization Mergers,
Penhall International Corp. is authorized to issue up to 250,000 shares of
preferred stock, par value $.01 per share ("Preferred Stock"), of which 10,000
shares have been designated as Senior Exchangeable Preferred Stock. With respect
to dividend rights and rights on liquidation, winding up and dissolution of
Penhall International Corp., the Senior Exchangeable Preferred Stock ranks
senior to the Common Stock, the Series A Preferred Stock and the Series B
Preferred Stock. Holders of Senior Exchangeable Preferred Stock are entitled to
receive, when as and if declared by the Board of Directors of Penhall
International Corp., out of funds legally available for payment thereof, cash
dividends on each share of Senior Exchangeable Preferred Stock at a rate per
annum equal to 10.5% of the Senior Exchangeable Preferred Liquidation Preference
(as defined below) of such share before any dividends are declared and paid, or
set apart for payment, on any shares of capital stock junior to the Senior
Exchangeable Preferred Stock ("Senior Exchangeable Junior Stock") with respect
to the same dividend period. All dividends shall be cumulative without interest,
whether or not earned or declared. "Senior Exchangeable Preferred Liquidation
Preference" means, on any specific date, with respect to each share of Senior
Exchangeable Preferred Stock, the sum of (i) $1,000 per share plus (ii) the
accumulated unpaid dividends with respect to such share.
Penhall International Corp. may, at its option, redeem at any time, from any
source of funds legally available therefor, in whole or in part, any or all of
the shares of senior exchangeable preferred stock, at a redemption price per
share equal to 100% of the then effective senior exchangeable preferred
liquidation preference per share, plus an amount equal to a prorated dividend
for the period from the dividend payment date immediately prior to the
redemption date to the redemption date. On February 1, 2007, Penhall
International Corp. shall redeem, from any source of funds legally available
therefor, all of the then outstanding shares of senior exchangeable preferred
stock at a redemption price per share equal to 100% of the then effective senior
exchangeable preferred liquidation preference per share, plus an amount equal to
a prorated dividend for the period from the dividend payment date immediately
prior to the redemption date to the redemption date.
The senior exchangeable preferred stock is exchangeable by Penhall
International Corp. at any time and from time to time for junior subordinated
notes (the "junior subordinated notes") in an amount equal to the senior
exchangeable preferred liquidation preference plus an amount equal to a prorated
dividend for the period from the dividend payment date immediately prior to the
exchange date to the exchange date. The junior subordinated notes will pay
interest from the date of exchange at the rate of 10.5% per annum in cash;
provided, however, that Penhall International Corp. shall be prohibited from
paying interest on the junior subordinated notes in cash for so long as the
notes shall remain outstanding. In such event, interest shall be deemed to be
paid by such amount being added to the outstanding principal amount of the
junior subordinated notes and shall accrue interest as a portion of the
principal amount of the junior subordinated notes to the maximum extent
permitted by law. If issued, the junior subordinated notes will mature on
February 1, 2007.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of Penhall International Corp., holders of senior exchangeable
preferred stock shall be entitled to be paid out of the assets of Penhall
International Corp. available for distribution to its stockholders an amount in
cash equal to the senior exchangeable preferred liquidation preference per
share, plus an amount equal to a prorated dividend from the last dividend
payment date to the date fixed for liquidation, dissolution or winding up,
before any distribution is made on any shares of senior exchangeable junior
stock. If such available assets are insufficient to pay the holders of the
outstanding shares of senior exchangeable preferred stock in full, such assets,
or the proceeds thereof, shall be distributed ratably among such holders. Except
as otherwise required by law, the holders of senior exchangeable preferred stock
have no voting rights and are not be entitled to any notice of meeting of
stockholders.
SERIES A PREFERRED STOCK
Penhall International Corp. has designated 25,000 shares of Preferred Stock
as Series A Preferred Stock. With respect to dividend rights and rights on
liquidation, winding up and dissolution of Penhall International Corp., the
Series A Preferred Stock ranks senior to the Common Stock and on a parity with
the Series B Preferred Stock. Holders of Series A Preferred Stock are entitled
to receive, when, as and if declared by the Board of Directors of Penhall
International Corp., out of funds legally available for payment thereof, cash
dividends on each share of Series A Preferred Stock at a rate per annum equal to
13% of the Liquidation Preference (as defined below) of such share before any
dividends are declared and paid, or set apart for payment, on any shares of
capital stock junior to the Series A Preferred Stock ("Junior Stock") with
respect to the same dividend period. All dividends shall be cumulative without
interest,
7
<PAGE> 8
whether or not earned or declared. "Liquidation Preference" means, on any
specific date, with respect to each share of Series A Preferred Stock, the sum
of (i) $1,000 per share plus (ii) the accumulated dividends with respect to such
share.
Penhall International Corp. may, at its option, redeem at any time, from any
source of funds legally available therefor, in whole or in part, any or all of
the shares of Series A Preferred Stock, at a redemption price per share equal to
100% of the then effective Liquidation Preference per share, plus an amount
equal to a prorated dividend for the period from the dividend payment date
immediately prior to the redemption date to the redemption date. On August 1,
2007, Penhall International Corp. shall redeem, from any source of funds legally
available therefor, all of the then outstanding shares of Series A Preferred
Stock at a redemption price per share equal to 100% of the then effective
Liquidation Preference per share, plus an amount equal to a prorated dividend
for the period from the dividend payment date immediately prior to the
redemption date to the redemption date.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of Penhall International Corp., holders of Series A Preferred Stock
shall be entitled to be paid out of the assets of Penhall International Corp.
available for distribution to its stockholders an amount in cash equal to the
Liquidation Preference per share, plus an amount equal to a prorated dividend
from the last dividend payment date to the date fixed for liquidation,
dissolution or winding up, before any distribution is made on any shares of
Junior Stock. If such available assets are insufficient to pay the holders of
the outstanding shares of Series A Preferred Stock in full, such assets, or the
proceeds thereof, shall be distributed ratably among such holders. Except as
otherwise required by law, the holders of Series A Preferred Stock have no
voting rights and are not be entitled to any notice of meeting of stockholders.
(4) COMMITMENTS AND CONTINGENCIES
LITIGATION
There are various lawsuits and claims pending against and claims being
pursued by the Company and its subsidiaries arising out of the normal course of
business. It is management's present opinion that the outcome of these
proceedings will not have a material effect on the Company's consolidated
financial statements taken as a whole.
(5) ACQUISITIONS
On April 29, 1998, Penhall Company, a wholly owned subsidiary of the
Company, purchased substantially all of the assets of Highway Services, Inc. for
approximately $9,654,000 plus the assumption of approximately $1,324,000 of
liabilities. Penhall Company paid approximately $5,962,000 in cash, with the
remainder payable in equal installments in April 1999 and 2000 pursuant to a
$3,692,000 secured promissory note, which bears interest at 5.51% per annum. HSI
is based in Minnesota and operates in approximately 25 states and is a national
provider of construction services including grinding, grooving, sawing, sealing
and pavement replacement. The acquisition has been accounted for by the purchase
method and accordingly, the results of operations of HSI have been included in
the Company's consolidated financial statements since April 29, 1998. The excess
of the purchase price over the fair value of the net identifiable assets
acquired of approximately $8,291,000 has been recorded as goodwill and is being
amortized on a straight-line basis over 15 years. The purchase agreement also
provides that certain stockholders of HSI purchase 3,147 shares of the Company's
common stock for $1,000,000.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and HSI for the nine months ended
March 31, 1998, as if the acquisition had occurred as of the beginning of that
period, after giving affect to certain adjustments, including amortization of
goodwill and increased interest expense on debt related to the acquisition. The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and HSI constituted a single
entity during such period.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
MARCH 31,
1998
-----------
<S> <C>
Revenues............................................ $83,599,000
Net earnings........................................ $ 4,359,000
Earnings per share:
Basic............................................ 1.02
Diluted.......................................... 1.00
Weighted average number of shares outstanding:
Basic............................................ 4,278,579
Diluted.......................................... 4,357,750
</TABLE>
On October 16, 1998, the Company purchased certain assets of Daley Concrete
Cutting, a division of U. S. Rentals, for $3,743,000 in cash. Daley Concrete
Cutting has four offices, three located in South Carolina and one in
metropolitan Atlanta.
On November 13, 1998, the Company purchased Lipscomb Concrete Cutting for
$4,252,000 of which $3,376,000 was cash and $876,000 was in the form of a note
due November 1, 1999, bearing interest at 6%.
Both of these acquisitions are being accounted for as purchases and
accordingly, the result of operations of the acquired companies are included
from the date of acquisition.
(6) SUBSEQUENT EVENTS
On April 2, 1999, Penhall Company acquired the assets of Diamond Concrete
Services for approximately $400,000 in cash. Diamond Concrete Services operates
out of offices in Birmingham and Mobile, Alabama and is a provider of rental
equipment used for concrete sawing and drilling. Additionally, Penhall Company
has agreed to purchase substantially all of the equipment and inventory of
Prospect Drilling and Sawing for approximately $1.9 million. The acquisition is
expected to be complete in early June 1999. Prospect Drilling and Sawing
operates out of offices in Minnesota and Wisconsin and performs concrete
demolition services including drilling, wall sawing, concrete removal, flat
sawing and concrete patching. Both acquisitions will be accounted for using the
purchase method of accounting.
8
<PAGE> 9
(7) CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following consolidating financial information is presented for purposes
of complying with the reporting requirements of the Guarantor Subsidiaries.
Separate financial statements and other disclosures with respect to the
Guarantor Subsidiaries are not presented because the Company believes that such
financial statements and other information would not provide additional
information that is material to investors.
The condensed consolidating financial information presents condensed
financial statements as of June 30, 1998 and for the three month and nine month
periods ended March 31, 1998 of:
a) Penhall Rental Corp. on a parent company only basis ("Parent") (carrying
its investments in the subsidiaries under the equity method),
b) the Subsidiaries (Penhall International Corp. and Penhall Company)
c) elimination entries necessary to consolidate the parent company and its
subsidiaries, and
d) the Company on a consolidated basis.
The condensed consolidating financial information presents condensed
financial statements as of March 31, 1999 and for the three month and nine month
periods ended March 31, 1999 of:
a) Penhall International Corp. on a parent company only basis ("Parent")
(carrying its investments in the subsidiaries under the equity method),
b) the Guarantor Subsidiaries (Penhall Rental Corp. and Penhall Company)
c) elimination entries necessary to consolidate the parent company and its
subsidiaries, and
d) the Company on a consolidated basis.
9
<PAGE> 10
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Receivables, net ......... $ 4,648,000 $ 2,399,000 $ 22,265,000 $ 29,312,000
Inventories .............. 169,000 -- 1,289,000 1,458,000
Costs and estimated
earnings in excess of
billings on uncompleted
contracts ............... 174,000 -- 802,000 976,000
Intercompany assets ...... 2,518,000 16,075,000 8,946,000 $(27,539,000) --
Other current assets ..... 309,000 700,000 786,000 1,795,000
------------ ------------ ------------ ------------ ------------
Total current assets .. 7,818,000 19,174,000 34,088,000 (27,539,000) 33,541,000
Net property, plant and
equipment ............... 4,729,000 8,844,000 31,434,000 45,007,000
Other assets, net ........ 561,000 1,006,000 8,208,000 9,775,000
Investment in subsidiaries -- 44,525,000 -- (44,525,000) --
------------ ------------ ------------ ------------ ------------
$ 13,108,000 $ 73,549,000 $ 73,730,000 $(72,064,000) $ 88,323,000
============ ============ ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current installments of
long-term debt and notes
payable to stockholders . $ 185,000 $ 132,000 $ 1,848,000 $ 2,165,000
Trade accounts payable ... 844,000 7,000 6,681,000 7,532,000
Accrued liabilities ...... 961,000 4,243,000 3,837,000 9,041,000
Billings in excess of
costs and estimated
earnings on uncompleted
contracts ............... 147,000 518,000 665,000
Intercompany liabilities . 3,306,000 6,834,000 17,399,000 $(27,539,000) --
------------ ------------ ------------ ------------ ------------
Total current
liabilities ......... 5,443,000 11,216,000 30,283,000 (27,539,000) 19,403,000
Long-term debt, excluding
current portion ......... 196,000 14,356,000 1,847,000 16,399,000
Deferred tax liabilities . 581,000 (935,000) 3,963,000 3,609,000
Accrued compensation ..... -- 5,306,000 -- 5,306,000
Stockholders' equity ..... 6,888,000 43,606,000 37,637,000 (44,525,000) 43,606,000
------------ ------------ ------------ ------------ ------------
$ 13,108,000 $ 73,549,000 $ 73,730,000 $(72,064,000) $ 88,323,000
============ ============ ============ ============ ============
</TABLE>
10
<PAGE> 11
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Receivables, net .......... $ 4,462,000 $ 18,000 $ 29,724,000 $ 34,204,000
Inventories ............... -- -- 1,904,000 1,904,000
Costs and estimated
earnings in excess of
billings on uncompleted
contracts ................ -- -- 178,000 178,000
Intercompany assets ....... 56,171,000 20,939,000 9,635,000 $ (86,745,000) --
Other current assets ...... 178,000 2,820,000 2,042,000 5,040,000
------------- ------------- ------------- ------------- -------------
Total current assets ... 60,811,000 23,777,000 43,483,000 (86,745,000) 41,326,000
Net property, plant and
equipment ................ -- 9,280,000 43,461,000 52,741,000
Other assets, net ......... 5,841,000 -- 9,851,000 15,692,000
Investment in parent ...... -- 4,001,000 -- (4,001,000) --
Investment in subsidiaries 22,178,000 -- -- (22,178,000) --
------------- ------------- ------------- ------------- -------------
$ 88,830,000 $ 37,058,000 $ 96,795,000 $(112,924,000) $ 109,759,000
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current installments of
long-term debt and notes
payable to stockholders .. $ -- $ 2,000 $ 2,858,000 $ 2,860,000
Trade accounts payable .... -- (338,000) 8,425,000 8,087,000
Accrued liabilities ....... 2,298,000 21,000 7,416,000 9,735,000
Billings in excess of
costs and estimated
earnings on uncompleted
contracts ................ -- -- 224,000 224,000
Intercompany liabilities .. -- 60,311,000 26,434,000 (86,745,000) --
------------- ------------- ------------- ------------- -------------
Total current
liabilities .......... 2,298,000 59,996,000 45,357,000 (86,745,000) 20,906,000
Long-term debt, excluding
current portion .......... 27,500,000 214,000 2,109,000 29,823,000
Senior Notes .............. 100,000,000 -- -- 100,000,000
Deferred tax liabilities .. 573,000 (267,000) 4,266,000 4,572,000
Accrued Compensation ...... -- -- -- --
Senior Exchangeable
Preferred Stock ......... 10,715,000 -- -- 10,715,000
Series A Preferred Stock .. 11,358,000 -- -- 11,358,000
Stockholders' equity
(deficit) ............... (63,614,000) (22,885,000) 45,063,000 (26,179,000) (67,615,000)
------------- ------------- ------------- ------------- -------------
$ 88,830,000 $ 37,058,000 $ 96,795,000 $(112,924,000) $ 109,759,000
============= ============= ============= ============= =============
</TABLE>
11
<PAGE> 12
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31, 1998
-----------------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues..................... $ 4,199,000 $ 749,000 $ 15,532,000 $ (749,000) $ 19,731,000
Cost of revenues............. 2,851,000 (71,000) 11,501,000 14,281,000
------------ ------------ ------------ ------------ ------------
Gross profit............... 1,348,000 820,000 4,031,000 (749,000) 5,450,000
General and administrative
expenses................... 863,000 1,290,000 2,549,000 (548,000) 4,154,000
Other operating income, net.. 10,000 1,000 (282,000) (271,000)
Equity earnings in
subsidiaries................ -- 1,007,000 -- (1,007,000) --
------------ ------------ ------------ ------------ ------------
Earnings before interest
expense and income taxes.. 495,000 538,000 1,200,000 (1,208,000) 1,025,000
Interest expense............. 60,000 210,000 139,000 (201,000) 208,000
------------ ------------ ------------ ------------ ------------
Earnings before income
taxes..................... 435,000 328,000 1,061,000 (1,007,000) 817,000
Income taxes................. 174,000 (94,000) 315,000 395,000
------------ ------------ ------------ ------------ ------------
Net earnings................. $ 261,000 $ 422,000 $ 746,000 $ (1,007,000) $ 422,000
============ ============ ============ ============ ============
</TABLE>
12
<PAGE> 13
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31, 1999
-----------------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues..................... $ -- $ 316,000 $ 30,899,000 $ (316,000) $ 30,899,000
Cost of revenues............. (2,000) -- 21,672,000 21,670,000
------------ ------------ ------------ ------------ ------------
Gross profit............... 2,000 316,000 9,227,000 (316,000) 9,229,000
General and administrative
expenses................... 274,000 (32,000) 6,543,000 (317,000) 6,468,000
Other operating income, net.. -- 216,000 211,000 427,000
Equity earnings in
subsidiaries................ 1,616,000 -- -- (1,616,000) --
------------ ------------ ------------ ------------ ------------
Earnings before interest
expense and income taxes.. 1,344,000 564,000 2,895,000 (1,615,000) 3,188,000
Interest expense............. 3,782,000 2,000 170,000 -- 3,954,000
------------ ------------ ------------ ------------ ------------
Earnings (loss) before
income taxes.............. (2,438,000) 562,000 2,725,000 (1,615,000) (766,000)
Income taxes................. (1,810,000) 159,000 1,513,000 (138,000)
------------ ------------ ------------ ------------ ------------
Net earnings................. $ (628,000) $ 403,000 $ 1,212,000 $ (1,615,000) $ (628,000)
============ ============ ============ ============ ============
</TABLE>
13
<PAGE> 14
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED MARCH 31, 1998
----------------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues .................. $ 14,408,000 $ 2,349,000 $ 57,410,000 $ (2,349,000) $ 71,818,000
Cost of revenues .......... 9,760,000 (48,000) 41,162,000 50,874,000
------------ ------------ ------------ ------------ ------------
Gross profit ............ 4,648,000 2,397,000 16,248,000 (2,349,000) 20,944,000
General and administrative
expenses ................ 2,837,000 3,021,000 9,773,000 (1,666,000) 13,965,000
Other operating income, net 143,000 5,000 268,000 416,000
Equity earnings in
subsidiaries ............. -- 4,864,000 -- (4,864,000) --
------------ ------------ ------------ ------------ ------------
Earnings before interest
expense and income taxes 1,954,000 4,245,000 6,743,000 (5,547,000) 7,395,000
Interest expense .......... 207,000 683,000 490,000 (683,000) 697,000
------------ ------------ ------------ ------------ ------------
Earnings before income
taxes .................. 1,747,000 3,562,000 6,253,000 (4,864,000) 6,698,000
Income taxes .............. 725,000 (158,000) 2,411,000 2,978,000
------------ ------------ ------------ ------------ ------------
Net earnings .............. $ 1,022,000 $ 3,720,000 $ 3,842,000 $ (4,864,000) $ 3,720,000
============ ============ ============ ============ ============
</TABLE>
14
<PAGE> 15
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED MARCH 31, 1999
---------------------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues ................... $ 5,905,000 $ 927,000 $ 96,991,000 $ (927,000) $ 102,896,000
Cost of revenues ........... 3,569,000 5,000 68,692,000 72,266,000
------------- ------------- ------------- ------------- -------------
Gross profit ............. 2,336,000 922,000 28,299,000 (927,000) 30,630,000
General and administrative
expenses .................. 1,408,000 12,330,000 17,177,000 (951,000) 29,964,000
Other operating income, net 29,000 959,000 579,000 (700,000) 867,000
Equity earnings (loss) in
subsidiaries .............. (322,000) -- -- 322,000 --
------------- ------------- ------------- ------------- -------------
Earnings (loss) before
interest expense and
income taxes ............ 635,000 (10,449,000) 11,701,000 (354,000) 1,533,000
Interest expense ........... 9,848,000 166,000 449,000 23,000 10,486,000
------------- ------------- ------------- ------------- -------------
Earnings (loss) before
income taxes ........... (9,213,000) (10,615,000) 11,252,000 (377,000) (8,953,000)
Income taxes ............... (2,751,000) (2,865,000) 3,825,000 -- (1,791,000)
------------- ------------- ------------- ------------- -------------
Net earnings (loss) ........ $ (6,462,000) $ (7,750,000) $ 7,427,000 $ (377,000) $ (7,162,000)
============= ============= ============= ============= =============
</TABLE>
15
<PAGE> 16
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED MARCH 31, 1999
---------------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities ............ ($ 12,023,000) ($ 13,830,000) $ 18,699,000 ($ 700,000) ($ 7,854,000)
------------- ------------- ------------- ------------- -------------
Cash flows from investing
activities:
Proceeds from sale of assets ... 82,000 360,000 281,000 723,000
Capital expenditures ........... (848,000) (923,000) (8,650,000) (10,421,000)
Acquisitions of Daley Concrete
Cutting and Lipscomb Concrete
Cutting, net of cash acquired .. (6,724,000) (6,724,000)
------------- ------------- ------------- ------------- -------------
Net cash used in
investing activities .... (766,000) (563,000) (15,093,000) -- (16,422,000)
------------- ------------- ------------- ------------- -------------
Cash flows from financing
activities:
Due to (from) affiliates ....... (26,210,000) 31,113,000 (4,903,000) --
Book overdraft ................. (346,000) 2,258,000 1,912,000
Borrowings under long-term debt 36,050,000 2,754,000 38,795,000
Repayments of long-term debt ... (8,550,000) (16,611,000) (286,000) (25,447,000)
Paydown on notes payable to
stockholders .................. (405,000) (405,000)
Borrowings on Senior Notes ..... 100,000,000 100,000,000
Debt issuance costs ............ (5,714,000) (221,000) (5,935,000)
Dividends paid ................. (700,000) 700,000 --
Proceeds from issuance of common
stock ......................... 399,000 399,000
Repurchase of common stock ..... (93,050,000) (93,050,000)
Issuance of Series A Preferred
Stock ......................... 10,428,000 10,428,000
Issuance of Series B Preferred
Stock ......................... 236,000 236,000
------------- ------------- ------------- ------------- -------------
Net cash provided by
(used in) financing
activities .............. 12,889,000 16,496,000 (3,152,000) 700,000 26,933,000
------------- ------------- ------------- ------------- -------------
Net increase (decrease)
in cash and cash
equivalents ............. 100,000 2,103,000 454,000 -- 2,657,000
Cash and cash equivalents at
beginning of period ............. (100,000) 542,000 (208,000) 234,000
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end
of period ....................... $ -- $ 2,645,000 $ 246,000 $ -- $ 2,891,000
============= ============= ============= ============= =============
</TABLE>
16
<PAGE> 17
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED MARCH 31, 1998
------------------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net cash provided by
operating activities $ 704,000 $ 2,068,000 $ 10,290,000 $ 13,062,000
------------ ------------ ------------ ------------ ------------
Cash flows from investing
activities:
Proceeds from sale of assets . 67,000 86,000 771,000 924,000
Capital expenditures (1,015,000) (714,000) (8,284,000) (10,013,000)
------------ ------------ ------------ ------------ ------------
Net cash used in
investing activities (948,000) (628,000) (7,513,000) -- (9,089,000)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Due to (from) affiliates 244,000 3,059,000 (3,303,000) --
Borrowings under long-term debt 17,681,000 17,681,000
Repayments of long-term debt . (21,518,000) (21,518,000)
Paydown on notes payable to
stockholders (750,000) (750,000)
Repurchase of common stock (56,000) (56,000)
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) financing
activities 244,000 (1,584,000) (3,303,000) -- (4,643,000)
------------ ------------ ------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents -- (144,000) (526,000) -- (670,000)
Cash and cash equivalents at
beginning of period -- 150,000 526,000 676,000
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at
end of period $ -- $ 6,000 $ -- $ -- $ 6,000
============ ============ ============ ============ ============
</TABLE>
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations and financial
condition of Penhall International Corp., (Penhall) should be read in
conjunction with the Penhall's unaudited condensed consolidated financial
statements and footnotes thereto included in this quarterly report on Form 10-Q
and the Company's audited consolidated financial statements and footnotes
thereto included in the Registration Statement on Form S-4, as amended, filed
with the Securities and Exchange Commission.
GENERAL
Penhall was founded in 1957 in Anaheim, California with one piece of
equipment, and today is one of the largest Operated Equipment Rental Services
companies in the United States. Penhall differentiates itself from other
equipment rental companies by providing specialized services in connection with
infrastructure projects through renting equipment along with skilled operators
to serve customers in the construction, industrial, manufacturing, governmental
and residential markets. In addition, Penhall complements its Operated Equipment
Rental Services with fixed-price contracts, which serve to market its operated
equipment rental services business and increase utilization of its operated
equipment rental fleet. Penhall provides its services from 30 locations in
eleven states, with a presence in some of the fastest growing states in terms of
construction spending and population growth.
The operated equipment rental industry is a specialized niche of the highly
fragmented United States equipment rental industry, in which there are
approximately 17,000 companies. Penhall has taken advantage of consolidation
opportunities by acquiring small companies in targeted markets as well as by
establishing new offices in those markets. Since 1994, Penhall has effected
seven strategic acquisitions, including Concrete Coring Company, an Austin-based
company acquired in 1995, Zig Zag Company, a Denver-based company acquired in
1996, Metro Concrete Cutting, an Atlanta-based company acquired in 1996, HSI, a
Minnesota-based company acquired in April 1998, Daley Concrete Cutting, a South
Carolina-based division of U.S. Rentals acquired in October 1998, Lipscomb
Concrete Cutting, a North Carolina-based company acquired in November 1998 and
Diamond Drilling, an Alabama-based company acquired in April 1999. During the
same period, Penhall established operations in four new markets by opening
offices in Las Vegas, Salt Lake City, Portland and Dallas.
Penhall derives its revenues primarily from services provided for
infrastructure related jobs. Penhall's operated equipment rental services are
complemented by long-term fixed-price contracts. Approximately 53% of Penhall's
revenues are derived from highway-related projects, approximately 29% of
revenues are generated from building-related projects and the remainder of
revenues is generated from airport, residential and other projects.
Revenue growth is influenced by infrastructure change, including new
construction, modification, natural disasters, such as the 1989 and 1994
earthquakes in Northern and Southern California. Other factors that influence
Penhall's operations are demand for operated rental equipment, the amount and
quality of equipment available for rent, rental rates and general economic
conditions. Historically, revenues have been seasonal, as weather conditions in
the spring and summer months result in stronger performance in the first and
fourth fiscal quarters than in the second and third fiscal quarters.
The principal components of Penhall's operating costs include the cost of
labor, equipment rental fleet maintenance costs including parts and service,
equipment rental fleet depreciation, insurance and other direct operating costs.
Given the varied, and in some cases
18
<PAGE> 19
specialized, nature of its rental equipment, Penhall utilizes a range of periods
over which it depreciates its equipment on a straight-line basis. On average,
Penhall depreciates its equipment over an estimated useful life of six years
with a 10% residual value.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenues. Revenues for the three months ended March 31, 1999 ("Interim 1999")
were $30.9 million, an increase of $11.2 million or 56.6% over the three months
ended March 31, 1998 ("Interim 1998"). The growth in revenues is attributable to
the acquisitions of HSI, Daley Concrete Cutting and Lipscomb Concrete Cutting,
which added $5.7 million of revenues in Interim 1999, strength in the Company's
operated equipment rental business in most of the markets it serves, and the
adverse impact that weather conditions had on Interim 1998's revenues.
The Company operated through 30 locations in eleven states at March 31,
1999, compared to 21 locations in eight states at March 31, 1998. The Company's
equipment fleet grew from 490 to 644 or 31.4% during this period.
Gross Profit. Gross profit totaled $9.2 million in Interim 1999, an increase of
$3.8 million or 69.3% from Interim 1998. Gross profit as a percentage of
revenues increased from 27.6% in Interim 1998 to 29.9% in Interim 1999. The
increase in gross profit as percentage of revenues was primarily attributable to
improved margins on contract services revenues and high equipment utilization in
Interim 1999.
General and Administrative Expenses. General and administrative expenses for
Interim 1999 were $6.5 million, an increase of $2.3 million or 55.7% from
Interim 1998. The increase in these costs was caused by general and
administrative costs of HSI, Daley Concrete Cutting and Lipscomb concrete
cutting, all of which were included in Interim 1999 but not in Interim 1998.
After adjusting for the impact of these costs, general and administrative
expenses were $5.7 million, a 37.2% increase from Interim 1998. The remaining
increase is primarily attributable to higher bonus expense in Interim 1999 as
compared to Interim 1998.
Earnings Before Interest Expense and Income Taxes. Earnings before interest and
income taxes increased $2.2 million or 211.0% from $1.0 million in Interim 1998
to $3.2 million in Interim 1999. This increase was primarily attributable to
increased revenues and higher gross profit margin in Interim 1999 as compared to
Interim 1998.
Interest Expense. Interest expense in Interim 1999 was $4.0 million, an increase
of $3.7 million over Interim 1998. The substantial increase in interest expense
was directly attributable to the issuance of $100.0 million of Senior Notes, the
incurrence of $20.0 million of Term Loans, and borrowings of $7.5 million under
the revolving credit agreement.
Income Taxes. The effective tax rate changed from 48.4% of earnings before
income taxes in Interim 1998 to 18.0% of loss before income taxes in Interim
1999. The lower effective tax rate in Interim 1999 is primarily attributable to
reorganization costs related to the Transactions, which are not deductible for
tax purposes.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
Revenues. Revenues for the nine months ended March 31, 1999 (Interim 1999) were
$102.9 million, an increase of $31.1 million, or 43.3%, over the nine months
ended March 31, 1998 ( Interim 1998). The increase was primarily attributable to
the acquisitions of HSI in April 1998, Daley Concrete Cutting in October 1998
and Lipscomb Concrete Cutting in November 1998 and general strength in the
construction markets that the Company serves. The acquisitions contributed $18.3
million of that increase. Also contributing to the improvement was significantly
better weather conditions in November through March of Interim 1999.
Gross Profit. Gross profit totaled $30.6 million in Interim 1999, an increase of
$9.7 million, or 46.2%, from Interim 1998. Gross profit as a percentage of
revenues increased to 29.8% for Interim 1999, from 29.2% for Interim 1998. The
increase in gross profit as a percentage of revenues was primarily attributable
to higher equipment utilization in Interim 1999.
19
<PAGE> 20
General and Administrative Expenses. General and administrative expenses for
Interim 1999 were $30.0 million, an increase of $16.0 million, or 114.6%, over
Interim 1998. General and administrative expenses as a percentage of revenues
increased from 19.4% for Interim 1998, to 29.1% for Interim 1999. The
substantial increase in these costs was caused by an increase of $8.9 million in
stock compensation costs triggered by the Transactions and $3.2 million of costs
incurred with respect to the Mergers. After adjusting for the impact of these
unusual transaction related costs and the general and administrative costs
associated with the HSI, Daley and Lipscomb acquisitions, general and
administrative expenses were approximately $15.4 million, an increase of $1.4
million.
Earnings before Interest Expense and Income Taxes. Earnings before interest and
income taxes decreased from $7.4 million in Interim 1998 to $1.5 million in
Interim 1999. The decrease in earnings before interest and income taxes during
Interim 1999 was primarily attributable to the transaction costs discussed
above. After adjusting for these transaction related costs earnings before
interest and income taxes improved from $7.4 million in Interim 1998 to $13.6
million in Interim 1999, an increase of 83.9%.
Interest Expense. Interest expense in Interim 1999 was $10.5 million, an
increase of $9.8 million over Interim 1998. The substantial increase in interest
expense was directly attributable to the issuance of $100.0 million of Senior
Notes, the incurrence of $20.0 million of Term Loans, and borrowings of $7.5
million under the revolving credit agreement in connection with the
Transactions.
Income Taxes. The effective income tax rate decreased from 44.5% of earnings
before income taxes for Interim 1998 to 20.0% of loss before income taxes for
Interim 1999. The change in the effective tax rate was primarily attributable to
approximately $1.3 million of reorganization costs related to the Transactions
which are not deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the nine months ended March 31,
1998 was $13.1 million compared to a use of cash in operations of $7.9 million
for the nine months ended March 31, 1999. For the nine months ended March 31,
1999, the significant use of cash from operations primarily arose from the stock
compensation expense of $8.9 million, $3.2 million in costs incurred with
respect to the Mergers, disbursement of certain tax gross up payments to
shareholders totaling approximately $2.9 million and a substantial increase in
accounts receivable during that period.
Management estimates that the Penhall Group's annual capital expenditures
will be approximately $15.0 million for fiscal 1999, including replacement of
equipment and purchases of new equipment.
Cash used in investing activities for the nine months ended March 31, 1998
was $9.1 million as compared to $16.4 million for the nine months ended March
31, 1999. Such cash was primarily used for capital expenditures of $10.0 million
for the nine months ended March 31, 1998 and $10.4 million for the same period
in fiscal 1999. Also, in the nine months ended March 31, 1999 cash used in
investing activities includes $6.7 million related to the acquisition of Daley
Concrete Cutting and Lipscomb Concrete Cutting.
Net cash used in financing activities for the nine months ended March 31,
1998 was $4.6 million as compared to cash provided by financing activities of
$26.9 million for the same period in fiscal 1999. Financing activities of the
Penhall Group are primarily the result of the Transactions for the nine months
ended March 31, 1999 and borrowings and repayments of long-term debt.
Historically, the Penhall Group has funded its working capital requirements,
capital expenditures and other needs principally from operating cash flows. As a
result of the Transactions, however, the Company has substantial indebtedness
and debt service obligations. As of March 31, 1999, the Company and its
subsidiaries had approximately $132.7 million of total indebtedness outstanding
(including the Notes) and a stockholders' deficit of approximately $67.6
million.
It is anticipated that the Company's principal uses of liquidity will be to
fund working capital, meet debt service requirements and finance the Company's
strategy of pursuing strategic acquisitions and expanding through internal
growth. The Company's principal sources of liquidity are expected to be cash
flow from operations and borrowings under the New Credit Facility. The New
Credit Facility consists of two facilities: (i) a six-year senior secured term
loan facility in an aggregate principal amount equal to $20.0 million (the "Term
Loan Facility"); and (ii) a six-year revolving credit facility in an aggregate
principal amount not to exceed $30.0 million (the "Revolving Credit Facility").
The Company drew $20.0 million of loans under the Term Loan Facility ("Term
Loans") on
20
<PAGE> 21
the closing date of the New Credit Facility in connection with the
Recapitalization. As of March 31, 1999, $22.5 million of additional borrowings
were available under the Revolving Credit Facility. The Term Loans amortize on a
quarterly basis commencing in September 2000 and are payable in installments
under a schedule set forth in the New Credit Facility. Advances made under the
Revolving Credit Facility ("Revolving Loans") are due and payable in full at
maturity. The Term Loans and the Revolving Loans are subject to mandatory
prepayments and reductions in the event of certain extraordinary transactions or
issuance's of debt and equity by the Company or any subsidiary of the Company
that guarantees amounts under the New Credit Facility. Such loans are also
required to be prepaid with 75% of the Excess Cash Flow (as such term is defined
in the New Credit Facility) of the Company or, if the Company's Leverage Ratio
(as such term is defined in the New Credit Facility) is less than 4.75 to 1.0,
50% of such Excess Cash Flow.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including, but not limited to, the
following: (i) the Company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general corporate or other purposes
may be impaired; (ii) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of principal and interest on
indebtedness; (iii) the agreements governing the Company's long-term
indebtedness will contain restrictive financial and operating covenants that
could limit the Company's ability to compete and expand; (iv) the Company's
leverage may make it more vulnerable to industry-related or general economic
downturns and may limit its ability to withstand competitive pressures; and (v)
certain of the Company's borrowings are and will continue to be at variable
rates of interest, which exposes the Company to the risk of increased interest
rates.
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. (Statement) 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes new standards for
reporting about operating segments in interim and annual financial statements.
Statement 131 is effective for fiscal years beginning after December 15, 1997
and does not need to be implemented for interim periods in the initial year of
application. The Company does not expect the adoption of Statement 131 to have a
material effect on its financial position or results of operations.
ITEM 3. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES
The Company is exposed to interest rate changes primarily as a result of its
notes payable, including Senior Notes, Term Loan and Revolving Loan which are
used to maintain liquidity and fund capital expenditures and expansion of the
Company's operations. The Company's interest rate risk management objective is
to limit the impact of interest rate changes on earnings and cash flows and to
lower its overall borrowing costs. To achieve its objectives the Company borrows
primarily at fixed rates and has the ability to choose interest rates under the
Term Loan and Revolving Loan. The Company does not enter into derivative or
interest rate transactions for speculative purposes.
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
-----------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
------- ------- ------- ------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Fixed rate debt ........... 0 0 0 0 0 100,000 100,000 98,000
Average interest rate ..... 12%
Variable rate LIBOR debt(1) 0 1,500 4,000 5,500 6,000 10,500 27,500 25,500
Current interest rate(1) .. 7.23
</TABLE>
- ----------
(1) The Company has different interest rate options for its variable rate debt.
See Footnote 2 in the condensed consolidated financial statements for
additional information.
Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Penhall has
established an informal Year 2000 task force, and has developed a plan which
lists the milestones
21
<PAGE> 22
achieved and yet to be completed to become Year 2000 ready. A checklist of
potential failure sources has been compiled and includes both information
technology and embedded technology systems. Penhall has completed its
assessment of its information technology and embedded technology systems and has
identified and taken measures to correct potential failures in those systems,
including a recent upgrade of the hardware and software components of its
information technology system. Penhall is currently conducting the
testing phase of its plan to determine whether the corrective measures which
have been taken are adequate. Penhall has not incurred significant
costs to date in connection with the Year 2000 issue and expects to be Year 2000
ready by June 30, 1999 without incurring significant additional costs. However,
delays in the implementation of Year 2000 solutions, or the failure of
Penhall's information technology or embedded technology systems to operate
properly in the Year 2000, could have a material adverse effect on Penhall's
business, results of operations or financial condition. Contingency
plans have not been developed for all mission critical information and embedded
technologies in the event Year 2000 readiness is not met. Penhall
expects to have these contingency plans in place by June 30, 1999.
Although Penhall is uncertain as to the extent its customers may be affected
by Year 2000 issues that require commitment of significant resources and may
cause disruptions in its customers' businesses, Penhall does not believe it has
a material relationship with any one third party that would have a significant
impact on Penhall if that third party was not Year 2000 ready.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penhall International Corp.
/s/ Martin W. Houge
-------------------------
Martin W. Houge
Date: May 14, 1999 Chief Financial Officer
23
<PAGE> 24
EXHIBIT INDEX
EXHIBIT
INDEX DESCRIPTION
- ------- -----------
27. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,891
<SECURITIES> 0
<RECEIVABLES> 35,463
<ALLOWANCES> (1,259)
<INVENTORY> 1,904
<CURRENT-ASSETS> 41,326
<PP&E> 93,590
<DEPRECIATION> (40,849)
<TOTAL-ASSETS> 109,759
<CURRENT-LIABILITIES> 20,906
<BONDS> 129,823
20,229
22,073
<COMMON> 10,000
<OTHER-SE> (87,854)
<TOTAL-LIABILITY-AND-EQUITY> 109,759
<SALES> 102,896
<TOTAL-REVENUES> 102,896
<CGS> 72,266
<TOTAL-COSTS> 72,266
<OTHER-EXPENSES> 29,097
<LOSS-PROVISION> 264
<INTEREST-EXPENSE> 10,486
<INCOME-PRETAX> (8,953)
<INCOME-TAX> (1,791)
<INCOME-CONTINUING> (7,162)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,162)
<EPS-PRIMARY> (7.35)
<EPS-DILUTED> (7.35)
</TABLE>
